By Accounting Fresh — Carlsbad, CA • Serving All of San Diego County
In San Diego County’s competitive construction market—where subcontractors, GCs, and trades operate on tight margins—accurate financial management is everything. Whether you’re building ADUs in Oceanside, handling TI projects in Carlsbad, or running electrical and plumbing jobs across North County, the right construction accounting practices protect profit, prevent overruns, and keep every project running smoothly.
Below are six construction accounting best practices every contractor in San Diego should follow to stay financially strong and tax-efficient.
1. Cash-Basis Accounting
Contractors typically choose between two methods of recognizing revenue: cash-basis or accrual-basis accounting. Many small San Diego construction businesses—especially those under $25M in revenue—prefer cash-basis accounting because it’s simple and tax-friendly.
Why San Diego contractors use cash-basis accounting:
- You record income only when cash hits your bank.
- Expenses are recognized when paid—not when incurred.
- No complicated tracking of receivables or payables.
- Helps minimize taxes by shifting income into the next year.
For example: If you ask a homeowner in Encinitas to pay a December invoice in January, that revenue gets taxed in the following year—perfectly legal tax planning for cash-basis contractors.
The downside?
Cash-basis accounting can make your financials appear healthier than they actually are, because unpaid bills don’t show up. It also isn’t ideal for larger construction firms or companies with inventory.
2. Accrual-Basis Accounting
Larger construction companies across San Diego County—especially multi-crew operations—often use accrual-basis accounting, where income and expenses are recorded when earned, not when cash moves.
Benefits of accrual-basis for contractors:
- More accurate financials
- Better visibility into upcoming liabilities
- Stronger project forecasting
- Required for certain long-term contracts
Accrual-basis is especially valuable for contractors running complex or multi-phase jobs in Del Mar, La Jolla, or Downtown San Diego.
3. Job Costing
Job costing is non-negotiable for profitable construction operations. Whether you’re a GC in Carlsbad or a roofer in Vista, you must track labor, materials, subs, and overhead at the job level, not just in your P&L.
Job costing helps you:
- Bid projects more accurately
- Track real-time project profitability
- Compare estimates vs actuals
- Control wasted labor or materials
- Prevent underbilling or overbilling
When your books are set up properly, your job cost reports become one of the most powerful tools for running a profitable San Diego construction business.
4. Percentage of Completion Method (PCM)
The Percentage of Completion Method is a commonly required accounting method for long-term construction projects. Revenue and expenses are recognized based on the amount of work completed—not only when the job is finished.
Contractors calculate progress using methods such as:
- Cost-to-cost: Costs incurred ÷ total estimated costs
- Efforts-expended: Hours worked ÷ total labor hours
- Units delivered: Units delivered ÷ total units
PCM is especially common for:
- Commercial buildouts
- Public works projects
- Longer multi-phase construction jobs
If you’re managing multi-month construction contracts in San Diego, PCM may be required for both GAAP and tax purposes.
5. Completed Contract Method (CCM)
The Completed Contract Method allows contractors to defer all income and expenses until the project is fully finished. This is often used for short-term projects (under 12 months).
Advantages of CCM for San Diego contractors:
- Defers income into future tax years
- Smooths out short-term fluctuations
- Helps small contractors reduce taxable income
This method is popular for:
- Kitchen/bath remodelers
- Small TI jobs
- Residential contractors completing projects in under a year
However, CCM has limitations and must meet IRS qualification rules.
6. Tax Reporting Strategies for Construction Companies
San Diego contractors can significantly reduce taxes with the right accounting method and strategic planning.
Choosing the right accounting method
Long-term contracts often require PCM under IRC §460, while certain residential construction projects with fewer than four dwelling units may qualify for the Completed Contract Method.
R&D Tax Credits for Construction
Many San Diego contractors qualify without realizing it. Eligible activities may include:
- Developing new construction methods
- Improving installation techniques
- Designing innovative processes or materials
- Engineering for efficiency, safety, or performance
These credits can offset tax liability and increase cash flow.
Leveraging Deductions for Pass-Through Entities
If your business is a:
- Sole proprietorship
- S-corp
- Partnership
- LLC
…you may be eligible for deductions such as:
- Losses up to basis limits
- 199A (QBI) deduction
- Retirement plan contributions
- Depreciation and equipment expensing
A construction-focused CPA can help maximize these.
Final Thoughts
Construction accounting is complex—especially in California where regulations, timelines, and tax rules add extra layers. When contractors implement the right accounting system, job costing, and tax strategies, profits become clearer, cash flow stabilizes, and projects stay on track.
If you’re a construction business in San Diego County—Carlsbad, Oceanside, Vista, Encinitas, San Marcos, or anywhere across the region—Accounting Fresh can help.